There's a Big Upside at Big Lots

Big Lots, the nation's largest closeout retailer, looks to be on the mend after two troubling years.

A new chief executive, David Campisi, with a 30-year track record in retailing, joined the company in May.

Other management changes, and some strategic initiatives aimed at boosting sales, could lead to operating improvements by the end of the year and help Big Lots shares regain their footing after a 30% slide from a March 2012 high. The company's strong free cash flow could also provide some aid.

Amid last week's selloff, Big Lots shares were trading for less than $32. The stock could rise to $40 in 2014.

Based in Columbus, Ohio, Big Lots operates 1,505 stores in the U.S. Its biggest markets include California, Ohio, Texas and Florida. The company also operates 80 stores in Canada, which it acquired from Liquidation World in 2011.

ENLARGE

Big Lots buys merchandise discounted as a result of liquidations, production overruns and packaging changes, and sells it at significantly lower prices than traditional discount retailers.

It sells a wide range of products, including food, furniture, appliances, toys and electronics.

In 2012, Big Lots struggled with some merchandising missteps, a problem compounded by an insider-trading controversy involving the company's longtime CEO, who announced his retirement in December.

Last month, Big Lots reported soft first-quarter sales, which it blamed on cold spring weather that depressed sales of seasonal goods such as lawn, garden and pool items.

The company also lowered its earnings guidance for the full year.

Big Lots expects to earn $171 million, or $2.98 a share, for the fiscal year ending next January, on revenue of $5.5 billion. Analysts expect earnings to rise the following year, aided by sales improvements.

Big Lots plans to install coolers and freezers this year in 75 stores, to sell items such as milk, eggs and ice cream. The company also is remodeling its stores, with 30 upgrades scheduled for 2013.

Canada offers fresh opportunities to grow. Big Lots has less competition for closeout retailing in Canada than in the U.S., and has been working to turn around the Liquidation World stores. It plans to rebrand some of them as Big Lots.

Mark Travis, chief investment officer of Intrepid Capital, which owns Big Lots stock in its funds, finds the cash flow attractive, and notes that the company has a history of aggressively returning cash to shareholders.

Since 2005, it has spent $1.9 billion to buy back stock, reducing shares outstanding by 49%. That will likely continue, which could drive higher earnings per share.

Mr. Travis thinks the shares are cheap and estimates intrinsic value in the low $40s. That makes the current price a bargain hunter's dream.

—David Englanderis a writer for Barron's. For more stories, see barrons.com.

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